Today at 2 pm the OECD announced the final BEPS action plan on a live webstreamed news conference.

Though this was very high level, it did not seem as though the final versions of the 15 action plans contain any significant surprises.

For me personally, I found the plans to ensure effective implementation the most news worthy.

National implementation:

The OECD plans a global tour within the next 3 months to countries and organisations such as the IMF and paragovernmental organisations to get continued political support for the adopted action plans. This will allow effective monitoring of the actions which require national implementation. In addition, the adoption of minimum standards will ensure uniformaty of BEPS implementation.

TP implementation:

Adoption of the proposals into the TP Guidelines. Basically done with the next publication. Country by Country reporting: effective as of 1-1-2016. A planner review in 2020 is most likely to extend the reporting to MNE’s below 750 mio.

Treaty implementation:

Multilateral instrument negotations between 90 countries are to start in the first week of November 2015. Goal is to have a complete instrument by end 2016. Maybe not all countries negotiating may sign, but for those who do, there will be a mass amendment of their treaty networks regarding actions 2 on hybrids, 6 on treaty abuse, 7 on article 5 and PE definitions, and maybe article 25 and mandatory arbitraiton (action 14).

So, will BEPS fall flat on implementation as many hope? In my opinion that does not seem likely. The OECD has set out to change behaviour; I think they will largely succeed. Questions are:

-will advisers whose main customers still are banks, be able to adopt?

-to which actions will the US sign up? Most realistic is probably, yes but with a reduced tax rate requirement for offshore business in future

What do you think of the BEPS announcements? Please comment below.

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9 comments

I attended the 4pm webcast and particularly Raffaele Russo’s comments lead me to believe countries will no longer be able to have effective tax incentives in order to create a competitive investment climate. Shifting activities from one country to another, evidently done transparently, will probably be blocked using one of the 15 actions. Wonder whether countries will implement measures once they discover this inroad into their sovereignty. US Congress has already seen this and sent two letter to Treasury.

Chinese premier Zhou Enlai famously said in 1972 that it was “too early” to assess the implications of the French revolution. When the full impact of the final BEPS package is capable of assessment remains to be seen.

Theo offers an interesting perspective on the ability of countries to determine their own tax policies. As tax practitioners we tend to evaluate reforms by reference to previous tax laws but seldom from the perspective of other areas of law. The question of harmful tax competition and practices is a central theme of the BEPS project. I wonder if it could usefully be judged by reference to common principles of competition law.

Two key principles underpin completion law in most countries:

The prohibition of agreements between undertakings, decisions by associations of undertakings and concerted practices which have as their object or effect the prevention, restriction or distortion of competition (e.g. Article 101(1) TFEU);

The prohibition of abuse by one or more undertakings of a dominant position (e.g. Article 102TFEU).

Jonathan, I think you raise an interesting point that brings up a whole lot of issues.
1. Is the competition law between states not regulated by the WTO (of which I wi confess I I know nothing)?
2. With regard to the U.S. tolerance of Irish Dutch sandwiches, should BEPS not have been a WTO issue all along?
3. If what I think Theo is hinting comes to pass and U.S. MNE’s continue to be allowed to grow outside the U.S. at single digit tax rates, should this become a WTO issue?
4. Tax subsidy cases (EU vs US) before the WTO are not new. Remember the U.S. Foreign production companies vs EU actions on bananas (or was it pork?) tit for tat sagas from the 90’s?
5. Finally, and actually most importantly, what is the EU doing to support its businesses in their international growth, the way the U.S. is supporting theirs? The recent Capital Markets Union paper seems like a step in the right direction, but we need more than that.

From a LATAM perspective and looking to the yet to come implementation stage, I wonder whether governments will subject BEPS final outcomes to an inter-nation equity analysis (the old but still alive residence-source conundrum),and if so, whether they may try to cherry-picking from the fifteen actions and implement solely those outcomes (or that part of them) which are beneficial or at least neutral to a source jurisdiction from a revenue perspective.

If that were at least a possibility, as I envision it would be, a parallel educational process of regional parliaments that accompany technical implementation will be advisable to make sure politicians understand the advantages of an in totum adoption of each BEPS outcome.

In various interviews Marlies de Ruiter has said that (rapid) consensus on BEPS could be obtained because the cake to share and tax will be bigger (no longer taxable income in tax havens). This looks a simplified picture of a carrot in a complex world. Fear measures enacted locally will indeed look at “what’s in it for me” and not the altruistic “what’s in it for the world”. If the latter would have been true, the complex proposals would not have been necessary. Now we will have double tax, more tax conflicts and intra-country disputes and after a few years frustrated politicians who did not receive the carrot promised to them by OECD and MinFin staff. Being politicians they’ll probably spend the money promised before receiving it. This will compound the frustration. The reaction to business at that time will no doubt be something to watch with interest.

I would like to offer my very preliminary (immature) personal opinion from China’s perspective briefly. I agree with Johann that it might be too early to overall evaluate the impact of the OECD final BEPS action plan. China as one of the largest capital exportors and investment receivers views BEPS action plan as a meaningful move to safeguard its fiscal interests as well as to breed confidence in voicing out its concerns. BEPS action plan to China echoes how China may coordinate with peer countries in fighting with offshore financial centers on removing tax collection loopholes. China SAT has clearly stated its position of supporting the BEPS action plan and I think that China would further assist OECD and international efforts in implementation thereof. Coincided with the BEPS action plan, China’s government may have to combine similarly important issues such as RMB internationalization, environmental protection and how to maintain its surplus in international trade as well as how to facilitate its overseas investments. TP remains a major and vivid challenge to tax collection and administration — how to work with multinational companies is still a focal point for tax collectors in China. Therefore, it would be too narrow to consider BEPS alone in implementing BEPS action plan, rather, a whole bucket of issues should be fully evaluated and considered in such implementation given the tight schedules listed therein and especially, the recent negotiation over Trans-Pacific Partnership.

Interestingly, India’s tax policy and jurisprudence has evolved over the years to deal with several contentious issues, outlined in various APAs. Action Points (AP) above.

A case in point is what constitute PE in the context of digital economy. Though the dust has not settled on this subject, the objective of Indian administration to apply strict source based rules of taxation is clear. Having said that, AP1 has not articulated rules for digital economy taxation, particularly intended actions of certain emerging economies to levy withholding tax or some form of tax under the nexus approach. As a matter of fact, AP1 caution nations to respect existing treaty obligations, should they decide to impose additional safeguards in their domestic law for levying any form of tax.

On AP 5, dealing with transparency and highlighting substance test, BEPS action point suggestion on ‘Nexus approach’ is interesting, particularly in light of R&D expenditure in jurisdiction which undertakes such activities. India will particularly keep a close watch on AP 5 given its focus on R&D.

AP 6 dealing with conditions for grant of treaty benefits, particularly introduction of limitation benefits (LOB rule) will be music to several emerging markets, who are recipients of Foreign Direct Investments (FDI). Implementation of AP 6 signals an end to treaty shopping and other treaty abuse strategies. AP 6 essentially highlights,’ Principle purposes of test’ (“PPT”) which largely aligns with the views expressed by Indian courts, though substance shall assume greater significance in the future.

AP 7 on artificial avoidance of PE shall further restrict definition of ‘preparatory and auxiliary’ activities, suggesting stricter source based taxation regime, which has been controversial issue in India in the context of liaison offices of MNC’s.

AP 8-10 aligning TP outcomes with value creation will again auger in favour of government’s representing large emerging markets. The guidance clarifies allocation of return of high value intellectual property factoring location savings and local market features. Simultaneously, AP 8-10 highlights importance of beneficial ownership of IP/intangibles. On both aspects of locational savings and intangibles, several multinational enterprises have ongoing disputes, which are lying in various dispute forums.

AP 12 dealing with mandatory disclosure norms is interesting from an Indian standpoint, given India’s timing to introduce GAAR from April 1, 2016. AP 12 recommends framework for countries to seek information from tax payers on potentially aggressive or abusive tax planning schemes. Countries such as India grappling with disclosure requirements are likely to implement at this AP.

AP 13 dealing with TP documentation on CBC reporting has been debated at length. What would be interesting is to see how countries such as India, who are net capital importers shall supplement their domestic law on TP documentation.

AP 14 dealing with effective dispute resolution mechanism will test endurance of emerging economies, particularly India, China & Brazil who have huge back log of unresolved MAP cases. AP 14 envisage a minimum standards by G20 to resolve MAP in timely manner and implement best practice to streamline administrative process. Though, India has put out a stiff opposition to provide mandatory binding MAP arbitration, most countries are moving to seek finality of international tax disputes via the arbitration process.

In summary, besides announcements in 2016 budget of the government, subordinate legislation by way of administrative circular and rules shall guide Indian government’s actions towards BEPS recommendations.
There is greater need for evolving a consultative approach with business representatives to put in place series of action points such that India will implement as it enters the new world tax order – with clarity, consistency and certainty.

At a UK IFA Branch meeting last night, there was an interesting discussion on whether the UK would “make money” out of BEPS. The consensus was that it is very difficult to assess. The project is designed to address specific issues and particular corporate structures, essentially of US based multinationals. That should increase the UK corporate tax take. On the other hand, a shift towards more source based taxation means that, as a capital exporter, more relief for foreign tax will need to be given. Many countries, including those that are not presently big capital exporters will find themselves asking the same question.